What Is an Inactivity Fee?
The term inactivity fee refers to a service charge that banks and other financial institutions impose on their clients when there is no activity on their accounts. Inactivity fees are charged when certain accounts go dormant or when investors don't make any buy or sell orders in their brokerage accounts for a certain amount of time. These fees are legal and can be avoided by making at least one transaction per year or by closing the account altogether.
- An inactivity fee is a service charge imposed by a bank, financial institution, or investment firm on their clients when there is no activity in their account during a specified time period.
- Banks may charge checking or saving account holders an inactivity fee if there are no deposits, withdrawals, transfers, or payments through their accounts.
- Brokerage and investment firms may require a minimum number of transactions per year or they may charge an inactivity fee.
- Consumers can avoid inactivity fees by conducting transactions or closing their accounts.
- Credit card issuers, who were once able to charge inactivity fees to anyone, are now limited as to how they can impose these charges since the Credit Card Accountability, Responsibility and Disclosure Act of 2009 was passed.
Understanding Inactivity Fees
Banks and other financial institutions charge their customers a variety of fees that contribute to their revenue. These fees include monthly maintenance fees, overdraft fees, foreign transaction fees, and inactivity fees. The latter are charged when customers stop using their accounts for any number of reasons. These fees may also be called dormant fees.
Banks charge inactivity fees for different types of accounts, including:
- Checking and savings accounts. As the name implies, these charges are imposed when these accounts show no customer-initiated activity. This means the account becomes dormant and may incur an inactivity fee if the account holder doesn't make any deposits, withdrawals, or transfers or has any automatic payments/debits from going through.
- Brokerage and investment accounts. The firms that offer these accounts make money from commissions on investor trades. When a customer makes infrequent trades, the brokerage doesn't make money from that customer. The broker can then try to compensate for the lack of commissions by charging inactivity fees. Smaller, passive investors who make a small number of trades are the most disadvantaged by inactivity fees.
The amount charged to consumers for inactive fees varies based on the type of account. Banks may charge a certain dollar figure for an inactive checking or savings account. On the other hand, firms may charge a percentage of the account balance for inactive brokerage or investment accounts, The best way to avoid an inactive fee is to conduct a transaction, such as a deposit or trade, or to have an automatic bill payment or direct deposit go through the account. One other option is to close the account.
Accounts can go inactive after a minimum of six to 12 months with no activity. Some institutions may consider accounts to be completely dormant after 24 months or more.
Inactivity Fees and Credit Cards
Many credit card issuers charged inactivity fees to cardholders who didn't make any purchases within a certain period of time as specified in their terms and conditions. But this practice became more difficult after the Credit Card Accountability, Responsibility and Disclosure Act of 2009 was introduced. This law banned companies from charging cardholders for not using their cards.
Cardholders had to make sure they used their cards periodically to avoid incurring charges when these dormancy fees were in effect. The time frame for considering an account inactive and assessing the fee depended entirely on the issuer. As with other accounts, the best way to avoid the inactive fee was to make a transaction. Closing the account, though would have been problematic for two reasons:
- Consumers who closed their accounts would no longer have access to a card for emergencies.
- It would have lowered their total available credit and, therefore, increase their credit utilization ratio, which may have led to a lower credit score.
Although the law mostly made dormancy fees illegal, card issuers can still charge consumers if there is no account activity for 12 months. The issuer must disclose the existence, frequency, and amount of these fees conspicuously before the card is issued and must not charge them more than once per month.
Inactivity charges still apply to some unused or inactive electronic gift certificates, gift cards, and general-purpose prepaid cards.
Examples of an Inactivity Fee
There are many banks that charge their customers inactivity fees when there is no activity that goes through their accounts. For instance:
- Allied Credit Union charges a $10 fee on savings accounts when there is no activity within a 12-month period and if the account has deposits of $200 or less.
- Citizens Bank charges customers a $5 dormant account fee for accounts with a balance of $5,000 or less that don't receive any deposits or withdrawals during a 365-day period.
- Brokerage firm TradeStation charges investors an inactivity fee of $50 if the account balance is less than $2,000. Traders can avoid this fee by making at least five trades during a 12-month period.